Bankruptcy exemptions are a privilege belonging to individual debtors in bankruptcy cases. An exemption permits a debtor to shield property that a trustee might otherwise take to pay creditors. Most, but not all exemptions are subject to dollar limits (e.g., a debtor may exempt $3,450 in one motor vehicle, 11 U.S.C. § 522(d)(2)). Under the Federal exemption scheme, a debtor also has a “wildcard exemption” of $1,150, that can be amplified by the unused portion of the debtor’s homestead exemption up to $10,825. The wildcard exemption can be applied to protect any interest of a debtor in property.

Often, debtors face difficult valuation questions for certain assets. What is the value of a one-third interest in a nascent business? How much is a gas lease worth when the lessee has not begun production and the debtor does not know when she will receive royalties or how much those royalties will be?

In 2010, the United States Supreme Court decided that a debtor’s exemption is limited to the dollar amount scheduled (even when the scheduled value and the value of the exemption are equal). Schwab v. Reilly, 130 S. Ct. 265 (2010). Thus, in the context of a gas lease, if production begins after a case is commenced and the debtor exempted $1.00 of her interest under the lease, she could find the royalties in excess of $1.00 are subject to claims by her creditors or a bankruptcy trustee. The Schwab case involved a debtor that understated the value of an asset but argued that, since the exempted value was equal to the scheduled value, the asset was no longer within the reach of the debtor’s creditors. The Court disagreed and limited the value of the exemption to the amount the debtor actually claimed exempt. The United States Court of Appeals for the Third Circuit recently ruled that Schwab was not limited to cases in which debtors purposefully understated the value of assets in order to protect more property than envisioned by the exemptions scheme. In re Orton, No. 11-4157 (3d Cir. Jul. 20, 2012). Rather, debtors are stuck with the value of their claimed exemptions. Therefore, even when a debtor puts a good faith estimate on the value of the asset and exempts the property up to that value, future appreciation (think of the gas well that starts producing after the debtor claims exemptions) in excess of the claimed exemption inures to the benefit of the debtor’s creditors.

Debtors and their bankruptcy lawyers are now forced to play a game of “The Price is Right” with assets. The Schwab and Orton decisions mean that, more than ever, it is important to develop a well-considered bankruptcy strategy with your bankruptcy lawyer.

For a bankruptcy court to confirm a chapter 11 plan, generally a debtor’s creditors must either be unharmed by that plan or have accepted it. 11 U.S.C. § 1129(a)(8). Under certain conditions, a debtor may cramdown or, have a plan confirmed over the objection of impaired creditors. 11 U.S.C. § 1129(b). Recently, the Supreme Court examined the conditions under which a debtor can sell property that secures a debt to creditor over the objection of that creditor. RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct. 2065 (May 29, 2012).
In the RadLAX case, the debtor proposed to sell its property over the objection of its secured lender, without permitting that lender the right to credit-bid, or bid using its secured claim as credit instead of new money. The secured creditor argued that 11 U.S.C. § 1129(b)(2)(A)(ii) provided it with a right to credit bid at the sale of its collateral. The debtor relied upon 11 U.S.C. § 1129(b)(2)(A)(iii), claiming that the sale gave the secured creditor the “indubitable equivalent” of its claim.
The RadLAX court reasoned section 1129(b)(2)(A) provided three paths to confirm a plan over the objection of a secured party. First, the plan could provide that the secured party retain its lien and accept deferred payments. Second, the plan could provide for the sale of the collateral securing the debtor’s obligation to the secured creditor (allowing the secured party to credit-bid) and, third, it could provide the secured party the “indubitable equivalent” of its claim. Since the second cramdown method applied specifically to sales of collateral and the third related, more broadly, to “the realization of such holders of the indubitable equivalent of [their] claims,” the more specific provision had to be given effect of the general one. RadLAX Gateway Hotel LLC at 2071-72. Thus, Supreme Court affirmed the opinion of the Court of Appeals, rejecting the debtor’s proposed sale.

Bankruptcy exemptions are critical to individual bankruptcy filers.  Exemptions give debtors in bankruptcy cases the ability to shield certain of their assets from the reach of their creditors.  A fresh start would not be very meaningful if it meant that you had to turn over every stitch on your back and every cent you have.  The United States Bankruptcy Code permits states to provide their own set of exemptions to debtors or to allow debtors to use the exemptions contained in section 522(d) of the Bankruptcy Code.  Some states, including the Commonwealth of Pennsylvania, allow debtors to select between the federal exemption scheme and the exemptions provided under state law.  The Pennsylvania exemptions are scattered through numerous statutes and still others are “common law exemptions,” contained within the written opinions of state courts of law.  Debtors should consult with a bankruptcy lawyer to determine which set of exemptions would protect more assets.

Generally speaking, the federal exemptions permit a debtor to exempt $21,625 in property that the debtor or a dependent of the debtor uses as a residence.  If debtors are married, filing a joint bankruptcy and own their home together, they can protect even more equity by applying both exemptions to their property.  In the case of a married couple where only one spouse has significant debt but both spouses own the home, it may make sense to apply the Pennsylvania exemptions.  In Pennsylvania, married couples who own a home usually hold it as “tenants by the entireties.”  The couple’s interest in property is not divisible and, therefore, creditors of only one spouse cannot resort to that property for payment.

Under the federal exemptions, debtors may exempt $3,450 of their interest in a vehicle.  In a simple example, if you own a vehicle that is worth $10,000 but, upon which you still owe $8,000, you may exempt your $2,000 interest in the vehicle in a bankruptcy case and continue paying on the $8,000 loan to keep the vehicle.  The federal exemptions also permit a debtor to exempt $1,450 of jewelry, $11,525 in household goods, furnishings, wearing apparel, appliances, books, animals, crops or musical instruments, $2,175 in “tools of the trade” of a debtor and most life insurance and retirement assets.  Additionally, the federal exemptions allow for  a “wild card” exemption of $1,150 in any property, which is increased up to $10,825 by any unused homestead exemption.  Thus, if a debtor does not need to exempt equity in a home, that debtor has more flexibility to exempt other property through the use of the wild card exemption.

Knowing how your exemptions work is a prerequisite to getting a meaningful fresh start in a bankruptcy case.  If you have questions about bankruptcy exemptions, you should consult with a bankruptcy attorney for a free consultation.  To find out how, call (412) 925-8194 now.

How can I afford to pay for a bankruptcy case? We hear the question so often that we thought it was time to post an answer on our blog. We think that the idea that someone can be too poor to file bankruptcy is as unjust as being too poor to afford an attorney in a criminal case. In 1963, the United States Supreme Court decided that people should not be denied access to a lawyer in a criminal matter involving the potential for imprisonment simply because they could not afford to pay that lawyer. Neither the United States Supreme Court nor the United States Congress has seen fit to provide similar protections to those facing financial ruin and in desperate need of a fresh start.

Robleto Law is proud to work with its clients to find payment arrangements that our clients can live with. Often, we will agree to represent individuals for as little as $100 down. When we agree to take on a case, your creditors become our problem. They are no longer permitted to make harassing phone calls to you–we deal with them. We have broad flexibility to create payment terms that will work for you. We can accept a credit card payment from a party that is not filing a bankruptcy case (think, parents or a non-filing spouse) or we can set up automated bank transfers at no additional cost.

If you believe you may have trouble paying for a bankruptcy case, contact us. We want you to have a fresh start, freedom from your debts and the ability to create a new financial future and improve your credit.

Call us today. 412-925-8194